The government has approved transportation of fertilizers through coastal shipping and inland waterways. This is a welcome move as it offers the possibility of significant reduction in freight cost besides taking less time in reaching the material to consumption points and being environment friendly as well.
It has also approved freight subsidy on the cost incurred on movement of fertilizers through this mode. In case of single mode or multi-modal transportation which includes coastal shipping, ‘the freight subsidy will be restricted to railway charges or the actual freight incurred, whichever is less’. Further, ‘only movement of subsidized indigenous fertilizers viz. urea and phosphate and potash fertilizers – through coastal shipping/inland waterways will be eligible for payment of freight subsidy at this stage’.
The crucial question is whether the promised benefit will actually accrue. This will depend on whether or not manufacturers get a conducive policy environment. So, what are the facts?
Considering the crucial role played by fertilizers in increasing food production and the overarching need to make it affordable to farmers, the union government has followed a policy of controlling their maximum retail price [MRP] at a low level unrelated to their cost of production and distribution which is higher. To ensure that production is viable at this price, it gives subsidy to the manufacturer to reimburse the difference between the two. The amount of reimbursement is known as subsidy.
In case of urea, the subsidy varies from unit to unit and is administered under the New Pricing Scheme [NPS] whereas for decontrolled complex fertilizers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme [NBS]. Since, this is subject to submission of cost data by individual units and necessary adjustment in subsidy thereof, de facto even this turns out to be unit-specific.
Considering India’s high dependence on import for meeting its fertilizer requirements viz. nearly 2/3rd in ‘N’, 90% in ‘P’ and 100% in ‘K’, the government also gives subsidy on imported material. The subsidy amount is equal to the landed cost of import [f.o.b. price plus ocean freight, insurance and handling charges at the port] and internal distribution over the MRP.
As regards freight subsidy, this is reimbursed to urea manufacturers under a uniform freight policy [UFP] in vogue since April 1, 2008 with an objective to ensure the availability in all parts especially distant/remote corners of the country. The subsidy covers transportation of urea from Plant/Port to the Block/District which includes primary movement normally by rail and secondary movement from the unloading rake point by road to the retail point.
For manufacturers of decontrolled complex fertilizers, in addition to flat/uniform subsidy, freight on account of primary movement of all P&K fertilizers [except single super phosphate (SSP)] is reimbursed on the basis of actual rail freight, as per the railway receipts. However, no reimbursement on account of secondary movement of all P&K fertilizers [including SSP], is provided.
In the above scheme of things, if a manufacturer also uses coastal shipping or/and inland waterways as a mode of transport either in conjunction with rails or road, it automatically follows that this will have to be taken into account while computing freight subsidy. The decision of the department of fertilizers [DoF] endorses this obvious point. However, a proviso ‘freight on railway charges or the actual whichever is lower’ will act as a disincentive.
Under a multi-modal arrangement involving inland waterways, the overall freight cost will most likely to be lower. Now, if, the manufacturer gets reimbursement for the lower amount only – as envisaged – then there is no incentive for him/her to switch over. On the other hand, if the actual turns out to be higher and he gets compensated only to the extent of lower freight on rail then he will suffer a loss. It boils down to a typical case of ‘Heads I win, Tails you lose’.
According to the ministry of shipping, 9-10 million tons of fertilizers is likely to be moved through coastal shipping or/and inland waterways by 2025-26. On this basis, the decision would save around Rs 1000 crore annually in freight cost. But, that would be possible only when, the manufacturers actually make a switch-over. But, the policy environment does not appear to be favoring this.
The government also seeks to restrict freight subsidy only to ‘indigenous subsidized fertilizers viz. urea and phosphate and potash fertilizers’. Excluding imported fertilizers [these account for a significant portion of total consumption] from the subsidy dispensation is unjust and inequitable. The use of inland waterways is particularly advantageous for imported fertilizers which land at the port and need to be moved over long distances to reach the consumption point. Yet, their exclusion from the scheme is anomalous.
The idea of encouraging movement by inland waterways is good. However, for this to yield desired result, the policy should have an element of ‘incentive’ for manufacturers to make it happen. Besides, it should cover all supplies including imports. Unfortunately, the bureaucrats have failed to address both.
Ironically, most of the policy moves in the fertilizer sector during the last three decades or so have been guided by an obsession of successive governments to reduce subsidy outgo without addressing the real factors behind its rise viz. control on MRP at an ‘artificially’ low level and unabated increase in the cost of raw materials such as natural gas, phosphoric acid, ammonia, rock phosphate etc.
Thus, they have resorted to tightening of pricing/subsidy determination norms, inadequate reimbursement for various costs including escalations and delayed payments [despite these measures which affected the health and growth of the industry, the subsidy has continued to balloon as the fundamental factors remain unaddressed]. The present decision to give freight subsidy ‘on rail charges or the actual whichever is lower’ is a continuation of this pattern only.
Our policy makers will have to shed this narrow mind-set to kick off major reforms in fertilizers and get optimum results from innovative steps such as encouraging movement by coastal shipping and inland waterways.